Cash Envelope Sinking Funds
“What are cash envelope sinking funds and how do you use them?” I think I receive that question through my direct messages and email at least once a day, so I thought I would tackle the subject this afternoon!
Let’s start at the beginning.
What are cash envelopes?
Simply put, cash envelopes are part of a budgeting system. Instead of using credit cards or debit cards to pay for items in a category you instead choose to use strictly cash. To manage that cash and to keep track of your transactions for each category paper envelopes are employed. You can get super fancy with the envelopes you choose or just use any envelope you have laying around the house! Totally up to you and your budget.
Bellow is a snippet from Dave Ramsey’s website about the envelope system:
“The envelope system is a way to track exactly how much money you have in each budget category for the month by keeping your cash tucked away in envelopes. At the end of the month, you can see how much cash is left by taking a quick peek in your envelope. How easy is that?
If you’re constantly going overboard in a certain category (hello, food!), then “cash out” the amount you’ve budgeted for and stick to it! The envelope system is a great tool to help you stop overspending!”
Check out his full blog post about cash envelopes here
What is a sinking fund?
A sinking fund is simply saving small sums of money in anticipation of a planned future purchase. This money can be saved online through banking institutions or with physical cash in envelopes. Ally Bank is one institution that offers users the ability to create “Buckets” (virtual envelopes) to save for future purchases.
For example, if you know you need to spend money for birthdays in 6 months you would decide how much you’re willing to spend and then divide that number by the number of months you have left to save for it. That will give you a number that you can then put in your budget to set aside each month.
Check out this interview I took part in for Quicken for even more info on sinking funds!
Put those two things together and you get: Cash Envelope Sinking Funds!
This is definitely not an original idea, and I’m in no way taking credit for it. The process of combining both cash envelopes and sinking funds into one thing are pretty standard with most budgeting methods.
Cash envelope sinking funds are simply identifying events that will require money to pay for, figuring out how much you need to save per month, and then withdrawing that amount of money to save and putting that cash into envelopes.
How cash works for us
For our cash envelope sinking funds I begin by looking at what events we will be funding in the upcoming year with cash. For us its:
Gift giving (for birthday’s during the year)
Valentines day (dinner)
Easter (dinner)
My daughters birthday (party and one gift)
Mother’s day (dinner)
Father’s day (dinner)
4th of July (dinner)
Back to school (clothing and supplies)
Thanksgiving (dinner)
Halloween (costume and candy for trick or treaters)
Christmas (dinner)
New year’s (dinner)
I use the cash envelopes designed by The Budget Mom. Highly recommend you follow her on Instagram and sign up for her newsletter. She is a true wealth of resources.
I like to work one by one when filling each envelope. So, I’ll take the money I have allocated for cash envelope sinking funds for the month, withdraw it from the bank in cash and then fill the first envelope in the stack. When that is completed I’ll move on to filling the next envelope and next. You get the idea.
To track these envelopes I keep :
A post-it note on the back of each one to know exactly how much I have saved.
A fun visual puzzle piece tracker I found from The Budget Mom . This tracker lives in my Erin Condren Life planner and is updated (colored) every time I add cash to an envelope.
Online sinking funds
Our cash envelope sinking funds are not massive sums of money. We do however have larger sinking funds not kept in cash, but instead kept in an high yield savings account through Ally bank. Those sinking funds have been identified and are funded throughout the year. I track those sinking funds on a google sheet that I designed and update it when I move money into that account.
Monthly cash envelopes
Alongside the cash envelope sinking funds are our monthly cash envelopes. These two groups of envelopes are totally separate both physically and on our budget. Physically they are kept apart by key rings. On our budget they are separated by category. The amount for each are decided ahead of the upcoming month and adjusted within the Quicken software.
Our current monthly cash envelopes include:
Emergency fire preparedness: I set aside a certain amount monthly to prepare for our fire season in October. Check out this post for more info on how I prepare for emergency for our family.
Babysitting: When looking at the upcoming month we decide if we need any date nights or time away. My Husband and I are both expats and have no family around us, so babysitting has become essential.
Pocket money: Each of us receives a set amount of cash each month. My Husband and I use ours for coffees out or small random purchases that don’t fall within our budget. My Daughter uses a jar system. She has 4 jars (give, grow, save spend) which she splits the cash equally into each month.
Experiences: This is a new cash envelope that I decided to start using. Each month I stick some cash in the envelope and we spend it on fun experiences during the month. Sometimes that’s a visit to the ice cream store, others I may save up money in that envelope to go to the zoo.
